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New Jobs Data Brighten Mood On Wall Street

The negative mood of the nation's financial markets evaporated yesterday after the July employment report signaled that the economy -- which grew briskly during this year's second quarter -- might be slowing down a little.

As the threat of an overheated economy subsided, so did the fear of an imminent move by the Federal Reserve to raise short-term interest rates. And this double-barreled relief sent long-term interest rates plunging and stock prices soaring.

The yield on the 30-year bond dropped to 6.73 percent from 6.83 percent, while the Dow Jones industrial average jumped 85.08 points, or 1.5 percent, to 5,679.83. The market's broader indexes, which had fallen further in the sharp July skid, rallied even more, with the Standard & Poor's 500-Stock index up 1.9 percent and the Nasdaq composite up 2.4 percent.

The Dow has now climbed back to just under 100 points below its all-time closing high set in May. It plunged more than 350 points following the surprisingly strong June employment report, which sparked fears of inflation and a Federal Reserve move to push up short-term interest rates.

By the end of the day yesterday some analysts, who until this week were worried that stocks were headed still lower, were predicting a summer rally. ''I thought we were going to retest the lows; now we may retest the May highs,'' said David Shulman, chief equity strategist at Salomon Brothers. ''The Goldilocks economy is back. Not too cold, not too hot. Just right.''

But some other analysts found the sudden mood change worrisome, in part because the rally is running counter to their forecasts.

''I wonder whether I am being stubborn or not,'' said Bryon R. Wien, the United States investment strategist at Morgan Stanley & Company who has predicted a 1,000-point decline in the Dow this year. ''This piece of news is good, but the reaction to it was extreme,'' he added, because ''the public is yearning for good news.''

Michael Metz, the chief investment strategist at Oppenheimer & Company, agreed. Speaking of the stock and bond markets, he said, ''They were depressive two weeks ago, and now they are manic.'' But, he added: ''The real world has not changed that much. It's just perceptions that have changed, and that's unnerving.''

Yesterday's rally capped a week in which a string of economic reports -- including those on retail sales, home sales and manufacturing -- all hinted that the economy might be slowing in July, the first month of the third quarter. The other key news was the Labor Department's report that showed wage increases, including benefits, were still in check, rising just under 3 percent in the year through June. But it took yesterday's employment report to confirm those beliefs and change the prevailing market mood.

Since Monday, the Dow has jumped 4.5 percent, while the yield on the 30-year bond has fallen to a four-month low from 7.09 percent. Whether this rally will continue depends on whether economic reports for the rest of July and August continue to fill out the economic picture that the financial markets have been hoping to see for months -- a portrait of an economy that is shifting from brisk to moderate growth while inflation remains in check.

Mr. Shulman said that flows of investors' money into stock mutual funds have not been strong recently, so that this rally is not yet a case of ''the public throwing money at the market.'' He suggested that it would take a resurgence in this money to confirm the rally. He also warned that the soft retail sales data that had helped calm market fears of strong growth could turn around after the Olympics, if it was true that many people were putting off shopping and eating out during the Games.

''If we get a spurt again in August, we could be back in the soup in September,'' he said.

Other analysts warned that the jobs data showed only that growth in July might be at a slower pace than in the second quarter. It does not show that the economy is weak in any significant way. This means that the Federal Reserve policy makers could still raise interest rates later in the year if the slowdown does not continue.

''One should definitely allow for a future Fed tightening,'' warned Donald Fine, the chief market analyst at Chase Asset Management. ''There is still enough strength in the economy.'' The new data, he said, would just put off any Fed action at the policy meeting on Aug. 20.

Lewis Crandall, the chief economist at R. H. Wrightson & Associates, said that he thought the economic data were still strong enough to warrant an increase in short-term interest rates by the Fed. But he said he did not expect one at the Aug. 20 meeting because ''the market now has minimal tightening expectations built in, and that will stop the Fed from shocking the market with an unexpected tightening.''

The main good news in the jobs report was that 193,000 new nonfarm payroll jobs were created last month, just below the expected increase of 200,000. While that is still strong growth, it is below the revised 220,000 new jobs created in June and below the 230,000 average for the year. But probably most importantly, the total of new jobs was not surprisingly high, as it was for June and early months. The report for June a month ago sent stocks tumbling and interest rates higher.

In the stock market, the rally was led by shares of banks, which benefit from lower interest rates. Beverage, semiconductor and computer software stocks also rose. The Pacific High Technology Index jumped 2 percent. Technology had been one of the hardest-hit sectors recently, with the Pacific index down nearly 22 percent since its high in May.

Among the leading gainers in the S.& P. index were Micron Technology, up 3 5/8 to 22 7/8, and Texas Instruments, up 3 5/8, to 46 3/4.

In the bond market, some analysts think that much of the near-term gain in long-term interest rates has already been made. Joseph Liro, the chief economist at CIBC Wood Gundy Securities, said that he expected the yield on the 30-year bond to stay around 6.75 percent in the near term, especially because of the need for investors to digest the quarterly Treasury auction of 3- and 10-year notes and 30-year bonds next week.